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Keysight (KEYS) Down 0.3% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Keysight (KEYS). Shares have lost about 0.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Keysight due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Keysight Q3 Earnings & Revenues Tops Estimates

Keysight delivered third-quarter fiscal 2019 non-GAAP earnings of $1.25 per share, beating the Zacks Consensus Estimate of $1.02. Further, the figure rose from 89 cents reported in the year-ago quarter and management’s guidance of 97 cents to $1.05 per share.

Non-GAAP revenues increased 8% year over year to $1.088 billion, surpassing the management’s guided range of $1.02-$1.06 billion. Non-GAAP core revenues (excluding the impact of currency and revenues from acquisitions concluded within the last 12 months) increased 9% year over year.

Meanwhile, GAAP revenues advanced 8% from the year-ago quarter to $1.087 billion. The Zacks Consensus Estimate for revenues was $1.045 billion.

Management is optimistic about capitalizing on key growth segments in several end markets. The company’s focus on launching solutions for growth markets like 5G, IoT, next-generation wireless, high-speed datacenters and automotive & energy is a key catalyst.

Restructuring Activities

In a bid to clear up ambiguities in the reporting process, Keysight removed the Services Solutions Group (SSG) as a distinct reportable segment starting first-quarter fiscal 2019.

The financial reporting is now realigned into three segments — Ixia Solutions Group (ISG), Electronic Industrial Solutions Group (EISG) and Communications Solutions Group (CSG).

Keysight restructured reporting segments as part of its go-to-market plan. Notably, SSG revenues are reflected in CSG and EISG, adjusted according to the respective services delivery.

The company has provided previously-reported figures, adjusted accordingly to streamline comparison.

Quarter in Detail

Orders grew 10% year over year to approximately $1 billion during the reported quarter. Notably, core orders also improved 10%.

CSG includes commercial communications (CC) and aerospace, defense & government (ADG) end markets. Non-GAAP CSG revenues climbed 13% to $683 million.

CC revenues of $440 million improved year over year on the back of “double-digit” growth in orders, driven by research and development (R&D) solutions related to technologies like 5G, 400 Gigabit Ethernet (GbE), and LTE-Advanced and Wi-Fi testing.

ADG revenues increased 2% year over year to $2435 million. Higher spending across the United States was partially offset by weakness in international end markets.

Keysight stated that orders for 5G solutions recorded double-digit growth year over year in the quarter under review. The acquisition of Ixia, in particular, is enabling the company to unveil new offerings in the 5G domain, including the latest 5G User Equipment Emulation scalable solution.

In fact, Keysight has a robust 5G portfolio, comprising a comprehensive set of test and design solutions enabling telecom companies to accelerate 5G deployment.

Non-GAAP EISG revenues increased 3% to $295 million, primarily owing to strength in automotive, general electronics and next-generation parametric tests.

In the reported quarter, the company witnessed robust R&D investments in autonomous driving, electric and hybrid electric vehicles, and connectivity.

ISG reported non-GAAP revenues of $110 million, down 7% year over year, primarily due to weakness in the network test market. This was partially offset by higher adoption of network visibility solutions.

Region-wise, non-GAAP revenues from Americas advanced 10% from the year-ago quarter to $444 million (41% of total revenues). Non-GAAP revenues from Asia-Pacific rose 11% on a year-over-year basis to $462 million (42%). However, non-GAAP revenues from Europe declined 3% on a year-over-year basis to $182 million (17%).

Margin Highlights

Non-GAAP gross margin was 63% during the quarter. CSG and EISG’s gross margin of 62.8% and 61.53% expanded 470 bps and 60 bps, respectively, on a year-over-year basis. Meanwhile, ISG gross margin contracted 320 bps to 72.3%.

Non-GAAP operating margin expanded 500 bps on a year-over-year basis to 25.2%.

Balance Sheet & Cash Flow

Keysight ended the reported quarter with cash & cash equivalents of $1.394 billion, up from the previous quarter’s $1.277 billion.

As on Jul 31, 2019, the company reported total debt (short-term plus long-term) of $1.79 billion, flat sequentially.

Cash flow from operations during the quarter came in at $274 million compared with the previous quarter’s $221 million.

Free cash flow was $244 million compared with the previous quarter’s $192 million.

During the reported quarter, the company repurchased approximately 760,000 shares for $60 million.

Guidance Strong

For the fourth quarter of fiscal 2019, the company expects GAAP revenues to be $1.078-$1.098 billion. Meanwhile, non-GAAP revenues are expected to be $1.08-$1.1 billion.

Non-GAAP earnings per share are projected to be $1.14-$1.2.

For the fiscal, non-GAAP revenues are expected to grow 9-10%.

Non-GAAP earnings per share are projected to be $1.14-$1.2.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 12.34% due to these changes.

VGM Scores

At this time, Keysight has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Keysight has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.



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